May 31, 2017 04:00 CDT

Consensus Actual Previous
Month over Month -0.2% -0.2% 0.4%
Year over Year 1.4% 1.4% 1.9%

Consumer prices provisionally moved in line with expectations in May. A 0.2 percent monthly fall lowered the yearly inflation rate from 1.9 percent to 1.4 percent, matching its final March outturn.

The flash HICP largely followed suit with a 0.2 percent dip that reduced its annual rate by also 0.5 percentage points to 1.5 percent.

The slowdown in the annual CPI rate was largely due to a sharp fall in energy where the non-regulated rate slumped from 9.1 percent to 6.8 percent. Unprocessed food (3.7 percent after 4.7 percent) also weighed. Nonetheless, even excluding these volatile items, the core rate eased from 1.1 percent to 0.8 percent.

In line with most of Europe recent CPI data have been heavily distorted by Easter. Today's outturns probably give a better picture of where inflation really lies. Prices seem to have recovered from earlier acute weakness but will struggle to accelerate from here without stronger growth of domestic demand.

The consumer price index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly and annual changes in the CPI provide widely used measures of inflation. A provisional estimate, with limited detail, is released about two weeks before the final data are reported.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as the Italy where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer. As a member of the European Monetary Union, Italy's interest rates are set by the European Central Bank.

Italy like other EMU countries has both a national CPI and a harmonized index of consumer prices (HICP). Components and weights within the national CPI vary from other countries, reflecting national idiosyncrasies. The core CPI, which excludes fresh food, is usually the preferred indicator of short-term inflation pressures.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.